HCA Must Pay Kansas City Foundation $162 Million

By JULIE CRESWELL

January 24, 2013

HCA, the nation’s largest profit-making hospital chain, was ordered on Thursday to pay $162 million after a judge in Missouri ruled that it had failed to abide by an agreement to make improvements to dilapidated hospitals that it bought in the Kansas City area several years ago.

The judge also ordered a court-appointed accountant to determine whether HCA had actually provided the levels of charitable care that it agreed to at the time.

The ruling came in response to a suit filed in 2009 by a community foundation that was created when HCA acquired the hospitals. Among other things, the foundation was responsible for ensuring that HCA met the obligations outlined in the deal.

The dispute in Kansas City is the second time in recent years that HCA has come under legal fire from officials in communities that sold troubled nonprofit community hospitals to HCA.

In another dispute in New Hampshire in 2011, a judge ruled in HCA’s favor, deciding that Portsmouth Regional Hospital would remain part of HCA after community leaders tried to regain control. During testimony in a 2011 trial, a former hospital official claimed he had difficulties getting HCA to pay for what he and others described as critical equipment and facility upgrades.

In an e-mailed statement, a spokesman for HCA said the company was disappointed in the court’s ruling and intended to appeal. He also added that the two cases were “rare exceptions” and that the company had enjoyed positive relationships with communities across the country.

The suit is among several problems for HCA. The company disclosed last year, for example, that the United States attorney’s office in Miami had subpoenaed documents as part of an inquiry to determine whether unnecessary cardiology procedures had been performed at HCA hospitals in Florida and elsewhere. At stake in that case is whether HCA inappropriately billed Medicare and private insurers for the procedures. HCA has denied any wrongdoing.

Financially, Thursday’s judgment is a slap on the wrist for HCA, which posted net income of $360 million in just the third quarter of last year. But the ruling may reverberate beyond HCA as communities across the country put their troubled nonprofit hospitals up for sale.

In many cases, the buyers with the deepest pockets have been profit-making hospital chains that want to convert the community hospitals to profit status, typically agreeing to spend money to fix them and to maintain certain levels of charitable care in the community.

In 2011, for instance, Vanguard Health Systems, which went public that year and has as its largest shareholder the private equity firm Blackstone Group, bought eight hospitals in Detroit. As part of that deal, Vanguard Health agreed to spend $850 million over five years to fix and maintain the hospitals.

A hospital owned by HCA in Kansas City, Mo. The company was sued by a local foundation for not abiding by a deal it made in 2003.

David Eulitt / The Kansas City Star

The trouble in the Kansas City area began a year after HCA acquired a dozen hospitals from Health Midwest in 2003 for $1.125 billion. As part of the deal, HCA agreed to make $300 million in capital improvements in the first two years and an additional $150 million in the following three. The hospital chain also agreed to maintain the levels of care that had been provided to low-income individuals and families in the area for 10 years.

But when the members of the Health Care Foundation of Greater Kansas City, a nonprofit created from the proceeds of the sale of the hospital, received their first report from HCA in 2004 they discovered the hospital was already way behind.

Of the $300 million it was supposed to spend in the first two years, its own documents showed it had spent only about $50 million, according to Mark G. Flaherty, one of the founding members of the foundation and its general counsel.

HCA’s reports to the foundation also indicated that the level of charitable care it provided at the system’s large inner-city hospital had fallen while charitable care provided at the more affluent suburban hospital had risen sharply, Mr. Flaherty said.

“That was a big red flag to us,” he said.

After repeatedly asking HCA executives for explanations but receiving none, the foundation sued HCA in 2009. The case went to trial for several weeks in 2011.

HCA argued in the trial that it had met its obligation to spend money on hospital facilities by building two new hospitals at a cost of hundreds of millions of dollars, rather than repairing older facilities. But Judge John Torrence of Jackson County Circuit Court ruled that the agreement called for improvements to existing hospitals.

He said HCA still owed $162 million of the $300 million it had agreed to spend between 2003 and 2005. He then named a court-appointed forensic accountant to determine whether HCA had met its other capital commitments and whether it provided the charitable care it had said it would.

HCA’s own written statements claimed “differing amounts,” the judge wrote in his ruling. One HCA report said it provided $48 million in charitable care to the area in 2009 while another report on its Web site said it provided more than $87 million. The annual report to the foundation claimed it provided $185 million in uncompensated and charity care that year, the judge wrote.

During the trial, when asked about the widely differing numbers, the president of HCA’s Midwest division and other HCA executives had no explanation.

The money will be paid to the foundation, which will use it to create grants to provide care for uninsured or underinsured families in the area. It is unclear whether the spending on improvements will occur.

Depending on what the court-appointed accountant discovers, HCA may owe even more money, said Paul Seyferth of Seyferth Blumenthal & Harris, which represents the foundation.

“We think they’re going to have a tremendously difficult time convincing anybody that they spent what they claim they spent,” Mr. Seyferth said.